Non-Linear Pricing and Conscious Consumption

Abstract

We consider a duopolistic market in which a green firm competes with a brown rival and each firm sells two quality-differentiated products. We study optimal non-linear contracts offered by the two firms when consumers: (i) Are privately informed about their willingness to pay for quality, and (ii) differ in their environmental consciousness. We characterize how consumers with different valuations for quality self-select into firms and show that the ranking of qualities, relative prices and profits all depend on the interplay between consumers’ valuations and firms’ cost heterogeneity. Interestingly, when consumers’ valuations for quality are relatively low, the brown firm does not offer a low-quality variety. This contrasts with the situation of full information, in which both firms commercialize a high- and a low-quality variety. Hence, the lack of information about consumers’ valuations may not only favor the green firm in terms of higher prices and profits, but also reduce the product range offered by the brown rival.